The answer to our title is "Because the stakes are high." That was the message delivered by Keller Allen of Allen & McLane, P.C., who spoke at the annual convention of the Northwest Human Resources Management Association in Spokane. His presentation covered the critical errors employers commonly make in misclassifying certain categories of employees as exempt from overtime pay requirements under federal and state laws.
The liability potential is enormous, Allen said, and even the most sophisticated employers make mistakes. The price tag: If a misclassification is negligent (as opposed to willful), liability for back overtime extends back 2 years. If the misclassification is willful, back overtime liability goes back 3 years.
"Plus, many state statutes--in fact, I'd say most--double the damages," said Allen. "And then there's liability to the IRS, because if you're not paying the wages, you're not paying payroll taxes, either."
Bright line test. Allen supplied a bright line test for employers to use to test their potential exposure. As most HR managers know, there's a minimum salary threshold under which no one is exempt from overtime: $23,660. That comes out to about $11.37 per hour. Allen's first piece of advice is to audit every job that pays $14 or $15 per hour, or less. "That's the threshold that the [federal] Department of Labor (DOL) has identified as worthy of scrutiny," Allen explained.
How does the DOL get involved? "There are two ways," Allen said. "One is the anonymous phone call. The other is the disgruntled employee--someone who left the job and realized, 'Hey--I worked a lot of overtime and never got paid.' That person will go to the DOL and complain."
Once the salary threshold is passed, the next test for exempt status is to determine whether an employee is in a bona-fide executive, administrative, or professional capacity.
"The executive exemption is easiest to determine," said Allen. "Most people have no problem knowing who's boss. Same with the professional exemption. Accountants, lawyers--they have specialized education and they're paid to figure things out, apply the rules to your situation, tell you your options."
"The most difficult exemption to apply is the administrative," he continued. "To be exempt, an administrative employee has to exercise discretion and independent judgment on significant matters. The red flag for me is the position with the word 'assistant' in the job title--'assistant buyer,' 'assistant marketing director.' Probably the person in that position doesn't have a lot of judgment or discretion. They probably do a lot of grunt work helping someone else."
Allen says he sees most of the misclassification going on among small retailers and in small restaurants and coffee shops. Whatever your business, the important thing to remember is that DOL starts scrutinizing at positions that pay $14 to $15 per hour or less. "There's where to do your auditing," Allen concluded.